SoundView of the opinion that intel is not going to stop price war even
if it would hurt the earnings. Both amd and intel are fighting for
market share
10:11am EDT 18-Jul-01 Wit SoundView (Scott Randall 203-462-7246) INTC AMD INTC.
Intel (INTC) Analysis of Earnings/Sales July 18, 2001
Intel (INTC) Price: $29.90 Buy July 18, 2001
Fiscal Year Dec. 31 F00A F01E F02E C00A C01E C02E 3Q01E 2Q01A 3Q00A
EPS ($) 1.64 0.51 0.70 - - - 0.10 0.12 0.41
Old EPS ($) 1.64 0.50 0.71 - - - 0.11 0.12 0.41
Revenue ($M) 33726 26450 29810 - - - 6524 6334 8731
Old Revenue ($M) 33726 26555 29875 - - - 6538 6410 8731
P/S - - - - - - - - -
P/E - - - - - - - - -
PE/Growth Rate - - - - - - - - -
Reported Estimate Last Qtr. Yr. Ago
Revenue ($M) 6334 6409.9 6,677 8300
Yr./Yr. Growth -23.7% -22.8% -16.5% 23.0%
Gross Margin 47.8% 48.5% 51.7% 62.9%
Operating Margin 14.7% 14.0% 19.5% 34.0%
Tax Rate 19.7% 29.8% 29.8% 31.7%
Shares 6889 6910 6899 7005
EPS $0.12 $0.10 $0.16 $0.50
Yr./Yr. Growth -75.4% -79.6% -54.3% 98.4%
Summary
* Intel's revenues and gross margins came in slightly below our expectations,
while lower operating expenses and a lower tax rate brought in EPS $0.02 ahead
of our estimates, with a lower tax rate accounting for the majority of the
upside.
* Intel indicated that it shipped about 6%, or greater than 1 million,
additional processor units sequentially. We believe that processor ASPs declined
by about 5.4% sequentially, higher than the 3.8% decline that we had been
modeling.
* From a market share perspective, Intel's growth of more than 1 million units
sequentially outpaced the roughly 450,000 units that AMD incrementally shipped.
This supports our thesis that INTC's pricing actions are slowing AMD's momentum.
* Intel's 3Q revenue guidance calls for a wide range of $6.2 billion to $6.8
billion, with our existing estimates at the midpoint of this range. In
addition, Intel indicates that gross margins will fall to roughly 47% in 3Q,
below our 48.5% estimates.
* Intel is actively accelerating the transition to the P4, although at current
component and system price points this transition will serve to further depress
margins.
* For the 2H in total, INTC continues to expect seasonal growth, although we
continue to believe this unit growth will be much more skewed toward 4Q and will
be offset by both ASP and margin degradation.
* Our price target remains at $33. Although we would not ignore the possibility
of a trading rally as the normal PC seasonality kicks in at some point in the
second half, we believe that better times for Intel will require greater
traction both from Microsoft's release as well as from a reduced cost basis P4
at the component and system level.
Intel's revenues and gross margins came in slightly below our expectations,
while lower operating expenses and a lower tax rate brought in EPS $0.02 ahead
of our estimates, with a lower tax rate accounting for the majority of the
upside. Based on lower profitability targets as well as changes in geographic
mix, Intel's full year tax rate will be reduced from about 29.8% to about 25.7%.
For the just-completed June quarter, Intel reported an effective tax rate of
19.7% vs. our expectations of 29.8%. From a product perspective, unit shipments
in all product areas except for processors were down, including Flash,
motherboards and networking products.
Intel indicated that it shipped about 6%, or greater than 1 million, additional
processor units sequentially. We estimate that Intel shipped close to 27 million
units, or an increase of about 1.4 million units. Offsetting this, we believe
that processor ASPs declined by about 5.4% sequentially, higher than the 3.8%
decline that we had been modeling. As we noted during the quarter, the pricing
environment for microprocessors continues to be challenging, with Intel
indicating that it expects continued pricing pressure to show up in 3Q. For 3Q,
we are estimating 5.6% growth in unit shipments, slightly higher than the 5.4%
increase that we had been modeling with ASPs down about 2.9% sequentially.
Of note, Intel does not normally provide sequential unit commentary. Clearly
this disclosure was meant to underscore the unit growth that Intel achieved
during the quarter. From a unit perspective, Intel's growth of more than 1
million units sequentially outpaced the roughly 450,000 units that AMD
incrementally shipped. Coupled with commentary from the company indicating that
it is focused on continuing to regain share through the end of the year, we
believe this underscores that market share goals continue to be the overriding
pricing criteria for both AMD and Intel. As such, we believe that the current
price war continues in full swing with no signs of either party calling a truce.
Intel's 3Q revenue guidance calls for a wide range of $6.2 billion to $6.8
billion, with our existing estimates at the midpoint of this range. In
addition, Intel indicates that gross margins will fall to roughly 47% in 3Q,
below our 48.5% estimates. With only modest revenue growth expected in 3Q and
with continued signs of pricing pressure, Intel's gross margins will continue to
be affected. For the year in total, Intel's gross margin guidance suggests 49%
plus or minus, less than previous guidance of 50% plus or minus, and slightly
less than our earlier estimates of 49.6%. Expected contribution from interest
and other income in 3Q could fall to zero, as expected investment losses
completely offset interest income. In the June quarter, interest and other
income came in at $129 million, higher than the $115 million that we had been
modeling.
Intel notes that by geography, demand is holding up best in Asia-Pacific and
Latin America while Japan and Europe are expectedly weak. The Americas are
characterized as being about as expected. By market segment, communications
continues to be weak with limited visibility continuing for both Intel's
dedicated networking products as well as for Flash. Small and medium sized
businesses are relatively stronger than are large corporations, which are
characterized as still being relatively slow. Consumer demand is characterized
as being spotty with China and India being up, Japan and Europe being down, and
the Americas being roughly stable.
From a product perspective, Intel indicates that it is accelerating its
conversion to the P4 at a faster rate than originally planned. While unit
crossover between the P4 and P3 was originally targeted for some time in 4Q, we
believe this target could be exceeded. Clearly, Intel is extremely focused on
driving P4 into volume acceptance to best enable it to move beyond competing
simply on price. Implicit in this goal is the ability to move to 2 GHz clock
speeds and beyond at a rate faster than AMD can achieve while at the same time
creating demand for this class of processors. While we would not be dismissive
of the combination of MSFT's launch of XP and INTC's P4 push in creating
additional demand for higher speed PCs, we believe the burden of proof remains
on the company.
Unfortunately although this faster than planned ramp of the P4 could strengthen
Intel's ability to compete in the market, the current die size penalty of the P4
is serving to further depress gross margins. Key to Intel's strategy will be
to accelerate the transition to 0.13 micron P4s as well. This transition from
0.18 to 0.13 micron technology will roughly halve the die size.
Balance sheet: As proof of Intel's current excess capacity, inventories
increased to 139 days up from 105 days in the March quarter. Intel's capital
spending budget continues at $7.5 billion for calendar 2001, with the company
having already spent about $4.8 billion in the first two quarters. As a result,
we believe that Intel's capital spending over each of the next two quarters
will be at lower levels. As Figure 1 shows, Intel's $7.5 billion capital
spending budget is well above historic trendlines. While much of the spending
has been targeted at 0.13 micron technology, we believe that the die shrink this
technology shift will allow will result in slower growth in capital spending in
2002 as growth in square inches of silicon moderates. While Intel has not
provided any guidance for calendar 2002 capital spending as of yet, we believe
that it could possibly fall to the $4-$5 billion level. |
